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When I met chancellor Hammond after AS 2016

It’s not every day that you have an informative meeting. And it’s not every day that you have an informative meeting with the chancellor, Philip Hammond, who met me after Autumn Statement 2016, writes Graham Fisher, chief executive of Orange Genie Group.

Flanked by other business leaders at the Thursday evening meeting, I got the distinct impression that the contractor sector is perceived as a problem rather than an opportunity. Moreover, until we remove this perception that we are focused on maximising our margins, potentially by avoidance or contrived schemes, and chasing our profits, I believe that we won’t be listened to. It’s clear that I’m not alone in noticing our ‘inability’ to exert influence.

Contractor sector must get involved

As to what else became clear during the meeting, it's that there's a firm expectation that large businesses are going to be a catalyst to drive best-practice through supply chains. That goes for both our niche contractor sector and the wider business-supply environment, which each face numerous changes because Brexithas to be managed. One of those changes being made by HM Treasury is to stem the loss of personal tax revenues, partly due to incorporation and abuse of Flat Rate VAT, as the chancellor told the House of Commons on November 23rd. This loss is something that No 11 Downing Street believes cannot be allowed to continue. To this end, a consultation on fairer tax treatment for people doing similar jobs is to be launched by officials. The meeting heard the contractor sector being urged to get involved, and I agree; we should.

At an earlier meeting, this time with HM Revenue & Customs, I was given a first glimpse of something that goes further than merely having the potential to affect contractors (as the consultation does); I saw a preview of the IR35-specific digital tool for the public sector.

The IR35 digital tool will:

Not be mandatory

Hopefully be live by April 1st

Be more established than it is currently – an alpha test questionnaire

As to the first point, when asked if the IR35 tool would be compulsory, the Revenue via its digital development team replied that it wouldn’t. The team then added that the tool will be ‘under continuous development into the future.’ A techie term perhaps familiar to IT contractors? To me, it implies the tool will be tweaked until it’s ready for the private sector – “inevitable” ContractorUK was told last week.

IR35 digital tool: what’s next and what it is

Yet tweaking will reach a cut-off point, of sorts, later this month, as a beta version of the tool is planned for January 2017. However, you can look for further clues before then, on Monday December 5th, when draft legislation is published.

As to what the digital tool is going to check for, it won’t be case law. After all, case law is often built when contractors challenge HMRC’s interpretation of IR35 and win. In this sense, it’s little wonder that the tool is going to reflect the Revenue’s view of IR35; its beliefs, hopes and assumptions about how the Intermediaries legislation is (and was) meant to work. So, to those of you who doubted HMRC could turn 16 years of complex case law rulings into an easy-to-use digital tool (currently consisting of no less than 55 questions!), you were right; it’s not going to.

As a result, there’s grounds to suggest that the contractor sector has a re-run of the discredited Business Entity Tests (which weren’t based on case law) on its hands. Some might not be surprised. Once you start from the understanding that case law was never going to be fed into the tool, everything starts to fall in place. HMRC couldn’t possibly prove that 90% of public sector contractors were not complying with IR35, despite being asked for evidence -- because that’s probably not the case. The truth is they would like 90% of PSCs to not be compliant with IR35 because that raises £440million a year in additional tax revenue. Remember, HMRC’s role isn’t to be nice or to be helpful; it’s to maximise tax revenues.

Inside HMRC’s IR35 head (continued)

After this thee-hour session with HMRC, I came away thinking that their strategy on IR35 is clear. In short, ‘throw more uncertainty at an already uncertain and complex area and develop a digital tool that will always work in their favour.’ Then, ‘force the liability for any unpaid tax onto an intermediary least likely to have the information and expertise to do anything other than say all PSCs in the public sector are inside IR35 -- or fit for being umbrella company employees.’

The outcome? HMRC won’t collect £440million; they’ll actually collect closer to £500million because 100% of contractors will have to operate through umbrella employment or as ‘deemed’ employees. Maybe the Revenue doesn’t realise this and it’s all just a cock-up, and not a conspiracy? Either way, my conclusion’s the same: the digital tool will struggle to win trust (to the same extent that HMRC’s IR35 Contract Review service has), and I just don’t see why anyone will use it. Cynical I know, but much like the takeaways from my meeting last week with the chancellor and business leaders, these impressions I got from meeting the Revenue aren’t just clear; they’re lasting.

30th November, 2016

Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.